john magee technical analysis::delphic options research ltd    

We are especially fond of writing our letter at junctures such as this. Regardless of the squirrel market taking place over the past six trading days we are inclined to regard the rally as over in the Dow and expect it to return to the lower trend line and to test the October low. We do not expect it to hold. We do not trade on our expectations. We would be liquidating trading longs here and putting shorts back on. We would be extremely chary if not phobic of long positions in general and investment longs in particular. There is no evidence whatsoever of a bottom in any of the major indices.

The S&P is in a similar situation. And we have the same analysis.

Although the QQQ rallied better it too should, according to our analysis test the previous low.

The three charts here give a vivid picture of markets assaulting their support, support which is weak to begin with. While no one (not even Wall Street Analysts with insider knowledge) can predict what will happen, hints appear on the charts. In the Dow the July low has already been pierced--a hint to the wise we think. Add the failure to follow through on the powerful up day Oct 1 and the powerful down day on Friday. Just because everyone has turned bearish doesn't mean the bear market is over. (Cf Law of Changing Cycles)

The S&P, interestingly, has not yet taken out the July low. We expect it to fall, partly based on the failure to follow through on the strong day Oct 1 among many other factors. At any rate stops on the short side are so far away that interested patience is indicated.

Reminding readers that cats and dogs go first fastest and fartherest in a bear market, we would opine that the QQQs are breaking the trail for the other indices. July's lows were broken in a trice in August, and September and October. In none of the markets is there any sign of a bottom formation. It is too late for the QQQs, and the Dow and S&P would have to hold exactly here to even begin thinking of a bottom.

Need we repeat our investment position? Long investors should be hedged (100%) or in cash or short term equivalents. Unless you have a particular strong instrument. Even in the case of exceptionally strong instruments we would liquidate on the breaking of mid term important trend lines. Analyses of individual issues are made on request: Use this link. It is late in the day for bonds. Investors who go both ways should be 100% short. Traders should be taking profits on weakness and shorting on strength.

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©2002 w.h.c. bassetti dor. graphics ©prophet.net. analyses by and responsibility of jmta::dor

Oct 1 The violent upsurge in the Dow (+4%) is a reaction to the bottom near 7500. Whether the bottom holds or not remains to be seen. Our best judgment is that the bottom will not hold and the downtrend will continue. There is no formula, algorithm or crystal ball which has any certainty on these things.

This five year chart of the Dow vividly illustrates the end and top of the greatest bull market in US history. Actually, while impressive, it doesn't hold a candle to the great 17th century tulipomania in Holland. Nonetheless, the long rectangle from March 99 to the fall of 2001, the frequent plunges out of it, and the breaking of the long term trend lines, gave ample warning of the bear market in which we are now immured.

From the 3rd Edition of our Major Turning Points Letter, dated September 13: "Bull, he dead. We think that the most likely course, the course of gravity, the course of least resistance, the course of the greatest pain for the greatest majority is, sorry, Down".   

Within days this gloomy prognosis is confirmed. With the August lows taken out, like a homing pigeon the Dow heads for a test of the 7500 low. Is there any one who doubts the pigeons are coming home to roost? The likelihood of the Dow making a bottom at 7500 are severely damaged by the NASDAQ going to five and six year lows. Remember those NASDAQ commercials? "Where do you find such companies?" The real question is where do you find such pigeons as to buy a pig in a poke? Is 1000 possible in the Dow? Keep mind open to all possibilities. Go with the trend. Also, considering the traditional October crash, remember that the 1929-34 Dow saw five waves of panic selling. The inexorable deterioration is vividly illustrated by looking at chart snapshots taken weeks apart. Here immediately Sept 20, below Sept 1 foretelling Sept 20 with the break of the steep short trendline.

A bull market that died hard. That actually was dead for some years, unbeknownst to those unfortunate fundamentalists who can't read charts. And the naive, analyst misled. It would be interesting to us to know how many of our readers read our letters and didn't act. Next time of course they will and that will be the time we make a mistake. Sigh. The Dow is shown from the beginning of the present down trend. Line charts of the qqqs and S&P are shown to dramatize the situation (if that is needed). As we have remarked the qqqs look like the chart of 1929 Dow. Neatly answering the question, can a market take back more than 100% of its base? In case you are curious as to where we think the base of the S&P is it is between 400-480.

We have repeatedly asserted that this was not a market to be long of. For three years (since .82 to the dollar) we have been saying investors should get long the Euro. So much for prophets being without honor. We are now considering and writing a letter on where investors should hide now. If you guessed real estate guess again. The new letter, titled "What to take to relieve the hangover: Investment Policies for the post debacle." Interested readers should email edwards-magee@edwards-magee.com to be informed when the letter is ready.

Chastened readers who may now see the simple power of technical analysis and are willing to go back to the drawing board (or school) can examine our seminars this site, or email edwards-magee@ucd.net.

©1999-2000 w.h.c. bassetti dor